Backup Withholding

Tax Topic 307

Banks or other businesses that pay you certain kinds of income
must file an information return Form 1099 with the IRS. The information return
shows how much you were paid during the year. It also includes your name and
taxpayer identification number (TIN).

These payments generally are not subject to withholding. However,
"backup" withholding is required in certain situations.

Payments subject to backup withholding:
Backup withholding can apply to most kinds of payments that are reported on Form
1099. These include:

Interest payments (Form 1099–INT)

Dividends (Form 1099–DIV)

Patronage dividends, but only if at least half of the payment
is in money (Form 1099–PATR)

Rents, profits, or other gains (Form 1099–MISC)

Commissions, fees, or other payments for work you do as an
independent contractor (Form 1099–MISC)

Royalty payments (Form 1099–MISC), and

Certain other payments.

Backup withholding also may apply to gambling winnings.

Withholding rules.
When you open a new account, make an investment, or begin to receive payments
reported on Form 1099, the bank or other business will give you Form W-9,
Request for Taxpayer Identification Number and Certification, or a similar form. You must enter your TIN on the form and,
if your account or investment will earn interest or dividends, you also must
certify (under penalties of perjury) that your TIN is correct and that you are
not subject to backup withholding.

The payer must withhold at a flat 28% rate in the following situations:

You do not give the payer your TIN in the required manner

The IRS notifies the payer that the TIN you gave is incorrect

You are required, but fail, to certify that you are not subject
to backup withholding

The IRS notifies the payer to start withholding on interest
or dividends because you have underreported interest or dividends on your income
tax return. The IRS will do this only after it has mailed you four notices over
at least a 210-day period.

How to prevent or stop backup withholding.
If you have been notified by a payer that the TIN you gave is incorrect, you
usually can prevent backup withholding from starting or stop backup withholding
once it has begun by giving the payer your correct name and TIN. You must
certify that the TIN you give is correct.

If you have been notified that you underreported interest or
dividends, you must request and receive a determination from the IRS to prevent
backup withholding from starting or to stop backup withholding once it has
begun.

Backup withholding. If income tax has been withheld under the backup withholding
rule, take credit for it on your tax return for the fiscal year in which you
received the income.

More detailed information on backup withholding can be found
in
Publication 1281,
Backup Withholding for Missing and Incorrect Name/Tin(s), including the procedures for payers, and in
Publication 505,
Tax Withholding and Estimated Tax.